Mikhail - Tax Court of Canada allows taxpayers to resile from their admission that they received funds from their corporation

After CRA inquired as to the treatment of rebates (in the form of traveller’s cheques, gift cards and prepaid credit cards) received by an incorporated pharmacy from generic pharmaceutical drug manufacturers, the two shareholders (a married couple) decided to treat the rebate amounts as additions to their income and filed T1 amendments accordingly. They may have been assuming that the corporation would receive offsetting deductions (to the amounts of the rebates received by it) through additions to its deductions for services fees paid to the husband and to the employee remuneration paid to the wife.

However, CRA applied its presumption that amounts paid to shareholders generally are received by them qua shareholder rather than employee (or services provider) and assessed the corporation on the basis that it had paid the rebate amounts to the individuals as non-deductible shareholder benefits, so that the rebates were included in income at both the corporate and individual level.

Monaghan J accepted the husband’s testimony that the corporation had spent the rebate amounts purchasing supplies for use in its business and that the reason that they had reported the rebate amounts as personal income was that this would make it easier to deal with CRA as they had no documentary evidence that the rebate amounts were spent at the corporate level. Accordingly, the rebate amounts were not taxable benefits and Monaghan reversed the personal reassessments and confirmed the corporate reassessments.

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